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Sarkozy's challenge: unleashing the French economy

Will new French president Nicolas Sarkozy be able to deliver on his promises of economic reform and unleashing the country's economic potential, where his predecessors have so often failed?

by The McKinsey Quarterly

Published: 31 May 2007

Last Updated: 23 Jul 2013

Diane Farrell, the director of McKinsey's Global Institute, and Eric Labaye, the head of its Paris office, assess the challenge and suggest how Sarkozy might go forward. Since 1995 France has lost 300,000 jobs in industries such as aviation and the auto sector. Low productivity in the public sector has placed a burden on the rest of the economy. The country's share of exports to developing countries has declined by 16%, double the rate of the US and triple the rate of Germany.

Still, it's not all doom and gloom for the new president. France can boast of several dynamic, job-creating sectors that could be built on with the support of a "presidential entrepreneur", as a colleague of Sarkozy has described him.

The authors say the president should be helping the innovation-driven sectors identified by their research - including aviation, semiconductors, electricity generation and nuclear energy; and branded sectors such as haute couture and luxury goods - rather than focusing on those sectors that are struggling to compete in a globalised market. The latter, which include automotive, telecoms equipment, apparel and electrical consumer goods, face a difficult future as international competition from low-cost producers increases.

McKinsey point out that between 1990 and 2003, the struggling sectors of the French economy have shed 360,000 jobs - or half the industrial jobs lost in that period. Meanwhile the dynamic sectors have enjoyed annual productivity gains of between 3.7% and 4.9%.

Sarkozy's challenge, say the authors, is to enable the successful sectors of the economy to flourish rather than trying to support the sectors that are struggling to compete. This is the same transition to specialisation in high-value added and innovative sectors of industry and services that all advanced industrial economies have undergone as jobs in low-value added manufacturing shift to the emerging economies.

As part of this process, Sarkozy will need to help make the French labour market more flexible and the workforce more employable - in fact he has already made moves on this front with plans to tighten eligibility for unemployment benefit and introducing new tax incentives to encourage people to work beyond the current 35-hour threshold. Other changes he will need to bring in include making it easier and less costly to hire and fire workers. Workers in the job-shedding sectors will need help in retraining and finding employment in other, growing sectors of the economy.

A further critical change is to raise the productivity of the public sector and, in a country with an ageing population, to reduce the burden of its pension system. These reforms will reduce the weight of the public sector in the economy - which today is second only to Sweden in Europe. However, this is also one of the most sensitive and sacred parts of the French model, and previously public sector workers have successfully resisted such reforms.

Finally, Sarkozy is urged to lift the regulatory and tax burdens that stifle the innovation and growth of France's most successful companies. In this light, say the authors, France should support the removal of the remaining hurdles in the EU to mergers and acquisitions, to encourage the emergence of competitive global-scale European companies.

Source:
A new direction for France
Diane Farrell and Eric Labaye
The McKinsey Quarterly, May 2007